Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
What helped (and what hurt) New Zealand Super’s return
The New Zealand Superannuation Fund (NZS) returned 14.9 per cent over the last year, bringing its 20 year returns to 10.03 per annum after costs and tax – “well ahead” of the fund’s own expectations. What worked, as it did for nearly every investor in the world, was exposure to global equity markets – which also supercharged the return of NZS’ benchmark reference portfolio, comprised of 75 per cent overseas equities, to 15.13 per cent.
That strong global equity performance meant it was challenging for NZS’ active strategies, many of which are in the private markets, to outperform the reference portfolio. That doesn’t mean there weren’t bright spots in what NZS calls “opportunities” – the building blocks of its active portfolio.
“Over the past year, our developed markets equity multi-factor strategy added significant value,” NZS’ wrote in its annual report. “This opportunity takes advantage of risk as well as behavioural and structural considerations in equity markets enabling certain factors to generate excess premiums… Most of our targeted factors performed well, with value as the highest-performing factor and low volatility as the only factor that detracted value.”
NZS also re-established its buyout capability in December after terminating it in 2021, having conducted additional research that “led (it) to gain a better understanding of the drivers behind the opportunity”. And a bet on trend following strategies, which underperformed in calendar 2023 and had a strong start to 2024, saw it onboard London-based outfit Florin Court alongside existing trend manager Man AHL, whose winning streak in the cocoa market contributed to NZS’ returns.
Natural catastrophe reinsurance created 12.6 per cent (around $128 million) of active return, and while NZS’ domestic equities exposure underperformed as a whole for 2023/24, its internally-managed machine-learning mandate “continued to outperform targets” and has grown to $100 million, with internal approval granted to increase its capacity to NZ$250 million. The strategy, dubbed “Keorangi”, was built to be free of human biases and narratives that would otherwise “colour the judgement of a traditional quantitative analyst” and went live in 2022.
NZS’ “opportunistic” opportunity was its worst-performing for 2023/24, driven largely by its holdings in LanzaTech, which saw its share price fall during the year. Strategic tilting saw its first annual negative return but remains NZS’ highest contributor to value-add since inception (approximately $4.5 billion). The fund also terminated its life settlements opportunity, which saw it purchase life insurance policies in the secondary and tertiary markets, with analysis showing drivers of return diminishing over time while the asset class remained niche and “difficult to scale” in line with the fund’s growth.
Since July 2023, the Guardians has also closed a host of mandates from the likes of BlackRock, KKR, Neuberger Berma and Canyon Capital Advisors across listed and unlisted asset classes.
Beyond its “opportunities” NZS also added value through efficient implementation – what it calls “portfolio completion”, and which has added around $549 million against the reference portfolio through rebalancing, foreign exchange hedging, securities lending and portfolio optimisation. Of the $549 million, $128 million was added in 2023//24.
